They say all good things must come to an end. Unfortunately, that plays true to many franchise relationships as well (though if it’s ending, it may not have been all that good, to begin with). Keep reading to learn more about how to get out of a franchise agreement without any legal troubles.
How to End a Franchise Agreement
Franchise agreements can end either by some form of termination or by expiring by their own terms. When most franchise agreements expire, the franchisee will generally have an opportunity to renew the franchise agreement. When considering whether or not to terminate or not renew (which is similar to terminating) a franchise agreement, there are several essential things franchisors and franchisees should keep in mind about how to get out of a franchise agreement.
First and foremost, franchisees and franchisors should each keep detailed records. Far too often, one party will want to suddenly refuse to renew or terminate an agreement but didn’t take steps to set themselves up for success. These include documenting all defaults and putting the other side on notice.
What is a Franchise Termination
Typically, neither the franchisor nor the franchisee has the right to terminate the franchise agreement unless the other party has breached the contract. A franchisee is usually not allowed to terminate the franchise agreement unless the franchisor committed a material breach (which generally means they did not fulfill one or more of their obligations to the franchisee). They did not cure the breach after receiving notice from the franchisee.
Franchisors, however, can terminate the agreement in the instance of any default by the franchisee. Some of these defaults will require the franchisor to give the franchisee a chance to fix the problem, while others allow immediate termination. The terminating party will almost always need to provide written notice to the party being terminated.
Things to Consider Before Terminating a Franchise
In deciding whether to terminate a franchise agreement, franchisors should understand all applicable laws related to termination. Many states have franchise protection laws that require franchisors to have “good cause” for terminating a franchise agreement. In addition, virtually all states have good faith and fair dealing laws that franchisees can use in their defense to a termination.
Default/Bankruptcy
Many franchise agreement defaults will usually qualify as a good cause (such as non-payment of royalties for an extended period). Some defaults may be so minimal, unreasonable, or unnecessary that a state will not view their violation as a reason to terminate the franchise agreement. Many bankruptcies are also inherently subjective and can introduce ambiguity into whether a default has even occurred. Additionally, some states may require franchisors to provide additional or minimum cure periods to franchisees in cases of termination. Violating any of the notice, good cause, or cure requirements may entitle franchisees to receive monetary damages or reinstatement of the franchise agreement.
Future Lost Profits/Liquidated Damages
Franchisees should be aware of the implications of being terminated by a franchisor. Many agreements will require franchisees to pay franchisors for “future lost profits” (usually labeled as liquidated damages). Franchisees may also be responsible for fees, royalties, and losing the right to operate. They are also expected to pay the franchisor for the remaining term. This is similar to when a tenant’s lease is terminated, but they still owe rent for the remaining years of the lease term. Additionally, franchisors may continue to enforce the non-compete provisions of the franchise agreement, preventing the terminated franchisee from opening a similar business post-termination period.
Suppose you are a franchisor considering terminating your franchise agreement or a franchisee worried they may be facing termination. In that case, it may be time to speak with a franchise attorney about your rights.
What is a Franchise Non-Renewal
There are many reasons why a franchisor or franchisee may not want to renew a franchise agreement. Thankfully for the franchisee, there is nothing to stop them from closing up and walking away when the agreement expires. However, they would still be bound by any provisions that survive the expiration (confidentiality, return of items, etc.). Franchisees should understand their obligations that survive termination. Walking away from a franchise agreement often means losing their business. So it might be better to sell the business to a qualified buyer.
What is Franchise Renewal
Franchisors are limited in picking and choosing which franchisees they want to renew. Many states require that franchisors have good cause not to renew a franchisee. This does not mean they have no control over whether a franchise agreement can be renewed. Virtually all franchise agreements require the franchisee to comply with the agreement to qualify for renewal.
Most franchise agreements also have specific renewal requirements that must be met (paying renewal fees, signing a new franchise agreement, remodeling or renovating the business, etc.). The franchisor may refuse to renew the franchise agreement if a franchisee does not comply with any of these provisions.
Additionally, the franchisee wishing to renew their franchise would have to sign a new agreement and, unless otherwise locked in the old agreement, would be subject to the terms and conditions in the new one. Depending on how much the franchise system has evolved over the years, the new franchise agreement may look significantly different than the one the franchisee signed 5 or 10 years ago. If the franchisee is unwilling to agree to the terms of the new franchise agreement, that might also effectively allow the franchisor to deny renewing the franchise.
Conclusion
Franchisors should document any problems or defaults in their relationship with every franchisee. Much like a termination, sometimes the franchisee’s conduct merits non-renewal, and sometimes it does not. However, suppose the franchisor can’t show that the alleged defaults occurred and that they provided the franchisee with sufficient notice to fix the problems. In that case, it will likely face a more challenging road in ending the relationship.
Contact Drumm Law to Get Help on How to Get Out of a Franchise
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